Surprising & counter-intuitive findings from recent hedge fund survey

10 September 2007

Think hedge funds are freaked out by recent market turmoil?  Think again.  According to a new industry survey (read press release), nearly half of all hedge funds see the credit crunch as “positive for (their) fund”.  In addition, only 15% felt that recent credit issues “would negatively impact the overall world economy.”

We also see anecdotal evidence of hedge fund resilience in August returns.  In fact, this Reuters story on Friday seemed to corroborate the survey’s findings.  Reports Reuters’ Svea Herbst-Bayliss:

“Based on what others in the business are saying, that statement might even hold true for the global $1.9 trillion hedge fund industry as a whole. After bracing for heavy losses, investors may be surprised to see the month wasn’t as bad as feared when performance numbers come out early next week.”

The survey released on Friday was sponsored by accounting firm Rothstein Kass.  It also contained a number of other findings that shed new light on some of the dynamics of the world’s hedge fund industry.

For example, the largest funds remain bullish on doing IPOs while the small fry are decidedly less convinced we’ll see a lot more IPOs.  That’s not entirely surprising since IPOs are off the radar screens for smaller firms.  But what is a little surprising is that small hedge funds seem to also believe that the number of IPOs won’t grow even for larger firms.  In other words, it appears that when it comes to IPOs, fund managers may interpret the universe from their own perspective.  

As regular readers know, there is a growing gap between large providers of hedge funds and smaller ones.  In a posting last spring, we pointed out that industry concentration had reached unprecedented levels.  Now the Rothstein Kass survey reveals that large (US$750m+) and small (US$100m-US$750m) hedge funds don’t necessarily share the same view of the world.

While IPOs aren’t on their agendas, small fry share the mega-funds’ desire for an eventual exit from their businesses.  Their preferred route, however, seems to via M&A with closer rivals.  We say “closer rivals” since the small fry actually seem less convinced of their larger brethren’s appetite for acquisitions than do the large players themselves. 

While both large and small hedge funds believe business processes will have to become “more business-like”, larger firms seem confident that their marketing will “out-muscle” the little guys and that running a successful hedge fund will “be more costly” in the future.

It seems that opinions about the evolution of the hedge fund industry are influenced heavily by a firm’s current marketing activities.  Those firms who aim to grow assets by 50% or more over the next three years believe large funds will dominate asset raising and small fry will be forced to consolidate.  But those with no such aim to grow assets are much less convinced of these trends. 

This is ominous for smaller hedge funds since those on the marketing circuit are arguably better qualified to forecast the direction of the industry over the next few years than those focused entirely on managing assets.

Along with its announcement of the survey results, Rothstein Kass also released the results of what it calls a “flash survey” of hedge fund managers’ feeling about recent market volatility.  According to this poll, nearly four times more hedge funds see the credit crunch as being positive for their fund than see it as being negative.

We can tell you the name of one fund manager who would agree with this finding: Paulson & Co.  It was revealed last week that Paulson & Co. Credit Opportunities Fund (which was short sub-prime loans) is up 410% YTD. 

Three cheers for the credit crunch? 

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One Response to “Surprising & counter-intuitive findings from recent hedge fund survey”

1. allaboutalpha.com: AllAboutAlpha.com Says:
   April 16th, 2008 at 11:26 pm

   […] Apparently Rothstein Kass’ mailing list includes a lot of optimistic managers.  Last September, when the firm last polled this group, 50% of hedge funds felt that the (then recent) credit crisis was “positive” for their hedge fund.  Less than 20% felt the credit crisis was going to have a negative impact (see posting).  […]